September Blues

Sep 27, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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Financial pundits love to discuss market history as a means to predict what might happen in the future. A common fact that gets discussed is that September has historically been a weak month for market returns. Since 1928 the S&P 500 (SPX) has averaged a decline of 1% during the month, far worse than other months that have a history of negative returns. February and May have both averaged a loss of just 0.1% over the same period. September 2022 is nearly over, and it appears that history is repeating itself as the last two weeks have seen dismal returns. There is no certain cause for September’s historic weakness, but one factor could be that investors now expect the month to show poor returns. This is a sort of self-fulfilling prophecy in which investors expect the market to fall, they begin to sell their positions which in turn, leads to a weak market; a vicious cycle. A more likely explanation this year is that underlying market conditions justify lower prices, and investors are responding accordingly.

Last week I wrote that I began to feel like a broken record writing about the relationship between investors and the Fed as an explanation for weak markets. Break out the turntable because last week was the same story. As I mentioned above, last week’s market performance was very similar to the week prior – SPX lost 4.6% and has taken the month-to-date return to -6.5%. Similarly, the Dow Jones Industrial Average (DJIA) lost four% and is down 6% for the month. Both indices are at or below their prior 2022 lows set in June and in precarious territory from a technical perspective: lower lows wouldn’t be a shocking development at this point.

The most significant development last week was the Federal Reserve following through with its 0.75% interest rate hike on Wednesday. This was the third consecutive meeting that the central bank hiked rates by 0.75%, taking their target rate to 3.0-3.25%. As important as the actual increase in interest rates was, the commentary from Fed Chairman Jerome Powell was just as impactful. The primary takeaway from his comments was that the Fed will continue to follow an aggressive path of rate hikes through 2023 in an effort to rein in inflation toward its goal of a 2% long-term average. Accompanying the rate hike were the Fed’s forecasts for economic growth, unemployment, inflation, and interest rates. The forecasts were not encouraging. Put simply, the Fed expects slower GDP growth, a faster increase in unemployment, and higher inflation than previously forecast. At the same time, the eventual level of the Fed’s target rate is expected to reach a higher level — approximately 4.4% — than previously expected. If markets were worried that a hawkish Fed would unintentionally tip the economy into a recession before, last Wednesday’s comments didn’t help.

Although September market performance has lived up to weak expectations, the coming third quarter earnings season could lead to things getting worse before they get better. Stock prices tend to follow earnings. The Energy sector is up 32% year-to-date on the back of very strong earnings growth. Nine of the remaining 11 sectors have seen negative performance this year on weaker or expectations for weaker earnings growth. Third-quarter earnings growth estimates have come down in recent weeks as analysts adjust for macroeconomic factors, higher expenses, slowing growth, etc. The fear now is that lower earnings paired with lower multiples (thanks to higher rates) could mean stocks remain under pressure for the foreseeable future.

Looking ahead, there will be several Fed speakers this week who will likely try to clarify the FOMC statement last week and alleviate any concerns investors may have about an imminent recession. Friday will bring a reading on Personal Consumption Expenditures, the Fed’s preferred measure of inflation.

Date Report Previous Consensus
Monday 9/26/2022
Tuesday 9/27/2022 Durable Goods Orders -0.1% -0.5%
S&P Case Shiller U.S. Home Price Index 7.3%
Consumer Confidence Index 103.2 104.5
Wednesday 9/28/2022 Pending Home Sales Index -1.0% -1.4%
Thursday 9/29/2022 Initial Jobless Claims 213K 215K
Continuing Jobless Claims 1.38M
Q2 Real GDP Revision -0.6% -0.6%
Friday 9/30/2022 PCE Price Index (y/y) 6.3%
Core PCE Price Index (y/y) 4.6%
Real Consumer Spending 0.2%
U. Michigan Consumer Sentiment Index 59.5


Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market